Excessive CEO Pay

Colossal CEO pay harms employees, impedes economic growth, and is a major cause of income inequality in America. CEO pay will continue to skyrocket unless it becomes a major political issue.

You have been a consistent critic of excessive CEO compensation. We hope you will consider one proposed solution: extending the recently enacted excise tax on CEO compensation above $1 million at non-profit organizations to for-profit companies.

There is no justification for today’s CEO pay levels:

CEOs are not paid for performance. In fact, CEO pay and performance are negatively correlated.

Being industry and company specific, CEO skills are seldom portable. Companies rarely bid for another company’s CEO. Three quarters of Fortune 500 CEOs were internal promotions. Less than two percent of Fortune 500 CEOs were previously CEOs of another public company.

Hundred-million-dollar paydays are not needed to motivate CEOs. The poorly motivated don’t get promoted to CEO.

Excessive executive pay is a small part of the money corporations waste. More costly is the effect on morale. When the CEO makes 300 times what the average employee makes, the sincerity of the boss’s proclamation that “there is no I in team” is problematic.

Worse, the pay system’s short-term focus discourages sound long-term investments. The system induces CEOs to have their company buy back its own stock, hoping to keep the price high, since stock price is often a bonusable metric and CEOs then get to cash in options at a high price.

From 2005 to 2016, stock buybacks by the S&P 500 totaled $5 trillion, equal to half of net income and twice as much as paid to shareholders in dividends. This is $5 trillion that could have been invested in American industry, in R&D, raising worker wages (e.g., Walmart), shoring up pension plans, and lowering prices to consumers (e.g., drug companies). Instead, CEOs cut R&D by 50% and reduced the ratio of capital investment to revenue to a 20-year low. Corporate America is eating the seed corn.

The worst economic consequence is the income inequality created by high CEO pay. From 1980 through 2015, while employee wages were essentially flat, the 0.1% quadrupled their inflation-adjusted income and captured 40% of all economic gains. The 0.1% are not athletes and movie stars. Seventy percent of them are business executives whose incomes are highly influenced by CEO pay.

Despite these costs, it is not in directors’ self-interest to control CEO pay. They will act more responsibly only when confronted with political action. While progressives have introduced a number of bills regarding executive compensation (H.R.138, H.R.2275, H.R.3633, S.1843 and S. 20), corporate boards will not perceive a threat until Democratic leaders agree on a single specific plan.

The recently published book, The CEO Pay Machine by Steven Clifford, advocates an excise tax on CEO compensation. Opening the door, the recent Republican tax bill imposed a 21% excise tax on CEO and other executive pay above $1 million at non-profit organizations. We advocate extending this excise tax to compensation above $1 million for CEOs and other top executives in the for-profit world. Extending this excise tax to the five highest paid company executives would generate about $1 billion in annual tax revenues.

Alone, the prospect of an excise tax on excessive pay could restrain CEO pay escalation. From 1978 to 2016, inflation-adjusted CEO compensation for S&P 500 CEOs rose 937 percent, 70 percent faster than the stock market. Over the same period, the typical worker’s real wages grew only 11 percent.

CEO pay is the low-hanging fruit in the fight for increased income equality and economic opportunity and growth. It is an issue that can unite the progressive and establishment wings of the Democratic Party and needs to be addressed now.

We would enjoy working with you to advance this issue and are willing to talk to you and your staff about this important topic.

Steven Clifford, former CEO, director on a dozen private and public corporate boards, and author of The CEO Pay Machine (New York: Blue Rider Press, 2017)

Robert Monks, former CEO, former bank chairman, federal and state executive, director on many private and public boards, cofounder of ISS and Lens Fund, and author of several books on corporate governance

Ralph Nader, consumer advocate and author who has established many citizen groups